Car sales down; economy to follow

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Further evidence that all is not well with the UK economy emerged with the release of the September new car sales figures. These were more than 20 percent down on 2017. The primary reason for the fall – the one latched onto by most mainstream media outlets – is the imposition of new EU emissions tests that have created a backlog of orders (the expectation is that October and November sales will be higher than usual):

“The UK new car market fell by -20.5% in September, according to the latest figures released today by the Society of Motor Manufacturers and Traders (SMMT). 338,834 vehicles were registered in the month, down around 87,000 on the previous year as new testing requirements continue to affect supply and distort the market…

“September’s large decline follows an unusually high August and a turbulent first eight months of the year as the market responded to a raft of upheavals, from confusion over diesel policy to VED changes and, latterly, transition to the new WLTP emissions standards. Year-to-date performance is currently 7.5% behind 2017, reflecting these factors and a drop in business and consumer confidence. Over the coming months, however, some rebalancing is expected as an increasing range of new models are certified for sale and backlogs ease.”

Without the anticipated pick-up in the autumn, the September figures take us back to the depths of the 2008-10 recession (the 2009 figure is artificially high due to the government scrappage scheme):

Source: SMMT

Inevitably, most mainstream media outlets were keen to blame it all on Brexit. The BBC, for example, told its readers that:

“The release of the figures coincided with a warning from Nissan that a no-deal Brexit would harm its business.

“The carmaker said that frictionless trade as part of the EU single market had enabled the growth that had seen its Sunderland plant become ‘the biggest factory in the history of the UK car industry, exporting more than half of its production to the EU’.”

“Sales are being hit by Brexit uncertainty, as some consumers and businesses are reluctant to commit to major spending decisions until the outcome of talks with the EU is clearer.

“The car industry has argued that the government must put the interests of the automotive sector at the heart of Brexit negotiations, or risk the loss of thousands of jobs and hundreds of millions of pounds of investment.”

Insofar as September (along with March) is a month when many company car purchases are made (because of the new registration) then Brexit may be playing a part. However, this is probably over-stated because of the rapid turnover of fleet vehicles. Moreover, the Nissan story concerns manufacturing rather than UK sales; the concern being that post-Brexit UK-based companies may not be able to sell into the EU single market.

Collapsing car sales, meanwhile (and after the impact of emissions test problems are stripped out) are more likely to be the consequence of the quadruple whammy that is currently impacting consumer spending across the economy:

Rising fuel prices

Rising interest rates

Rising inflation

Stagnating wages

Fuel prices have long been known to affect vehicle sales – both number and type. It is instructive that in addition to the absolute number of sales falling; medium size (popular fleet) vehicles like the Ford Focus and the Volkswagen Golf have been particularly hard hit while small, fuel efficient vehicles like the Ford Fiesta and the Vauxhall Corsa have risen to the top of the sales chart.

Interest rate increases impact sales in two ways. First, they increase the cost of car finance. Second, they remove purchasing power from consumers who are obliged to pay more of their stagnating monthly paycheques on servicing existing debt. This, of course, is compounded by rising inflation which also removes purchasing power from the economy.

This combination of factors – exacerbated by the UK government’s ideological austerity cuts – has already begun to decimate the non-food High Street retail sector and the hospitality and leisure sector. The fall in car sales – which continues a trend which began in 2016 when oil prices began to rise again – suggests that the drop in consumer spending is beginning to impact high-ticket purchases. The big fear, of course, is that the fall in car sales will be followed by a general fall in house prices (something that is already underway in London).

All of the signs are that 2018 will be looked back on as the year that economic calm was replaced by economic volatility; and there is every likelihood that another crash is just around the corner. That said we should not mistake inevitability for imminence. Few contrarian economists believed that governments and central banks would be able to maintain the (albeit weak) recovery for the best part of a decade after 2008; but they did. For this reason, we should not rule out the possibility of their staving off another crash for a few more years yet. Nevertheless, falling new car sales are another indicator that the period of economic calm (2014-16) is now well and truly behind us.

As you made it to the end…

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